Finance (No.2) Act 2024: Impact on Your Paycheck & Tax Returns

The Hon’ble Finance Minister presented the Union Budget for the Financial Year (FY) 2024-25 (Assessment Year AY 2025-26) on July 23, 2024 and it got Presidential assent on August 16, 2024, without any change to the proposals made in July impacting payroll.

Most of these changes favour the employees who have opted for the New Tax Regime u/s 115BAC(1A). So, let’s take a quick recap of what Budget 2024-25 has brought for private sector employees and how it is handled in Ramco Payroll.

A. Better Tax Rates under New Tax Regime

This means an annual tax savings up to ₹5,000 for an employee with taxable income more than ₹6,00,000 but less than ₹9,00,000. For an employee with annual taxable income more than ₹9,00,000, this would mean a total tax savings up to ₹10,000.

Standard deduction for employees opting for New Tax Regime has increased from ₹50,000 to ₹75,000 for the FY 2024-25. This means your total taxable salary income will now get reduced by ₹75,000 (instead of ₹50,000) to calculate your annual taxable income. However, the standard deduction remains at ₹50,000 for employees who have opted OUT of the New Tax Regime u/s 115BAC(6) (simply, who have selected Old Tax Regime).

Now, employers can claim their contribution to a pension scheme specified u/s 80CCD(2), viz. National Pension Scheme (NPS) and Atal Pension Yojana (APY), up to 14% of your salary as deductible expenditure. And the employees opting for New Tax Regime can also claim deduction for the same u/s 80CCD(2) up to 14% of their salary. Earlier, this limit was 10% of salary. It’s a win-win for both employers and employees!

However, it is important to reiterate here that if you have opted for Old Tax Regime, you can claim deduction u/s 80CCD(2) towards your employer’s contribution only up to 10% of your salary. (Not much of a win for employees here!)

Employee Declaration on Ramco Payroll

You can navigate as under to declare the deduction u/s 80CCD(2):

ESS > Indian Taxes > Record Tax Declaration/Proof Submission > Deductions under Chapter VI A

Or, if it is handled through Ramco’s Compensation Module, employer’s contribution % can be increased from 10% to 14% and it will be automatically considered as taxable income first and then, as deduction u/s 80CCD(2) depending on the tax regime selected by you.

The existing provisions of Section 80G (Deduction for Donations) provide for deduction from total taxable income of an individual any sums paid as donations to the “National Sports Fund to be set” up by the Central Government. As the Government had already set up the aforesaid fund by the name of “National Sports Development Fund”, deduction u/s 80G will now be available for donations made to “National Sports Development Fund” instead of “National Sports Fund”.

Employee Declaration on Ramco Payroll

You can navigate as under to declare the deduction u/s 80G:

ESS > Indian Taxes > Record Tax Declaration/Proof Submission > Deductions under Chapter VI A > 80G- National Sports Development Fund

Section 192 of the Income Tax Act requires employers to consider income other than salary also, as declared by you, so as to calculate appropriate TDS that can be deducted from salary which can reduce excess tax liability for you at the time of annual return filing. To further ease tax filing and resolve cash flow issues, from October 2024, you can also declare the TDS or TCS paid by you to claim its credit. This will reduce your monthly TDS from salary and increase your take home salary, instead of claiming the same as refund at the time of return filing.

However, please ensure that against TDS claimed, you also declare the relevant income, otherwise it can increase tax payable at the time of return filing and may attract interest and penalty as well.

Employee Declaration on Ramco Payroll

You can navigate as under to declare TDS/TCS paid:

ESS > Indian Taxes > Record Tax Declaration/Proof Submission > Review & Confirm > Other Declaration

To declare other income details, you can use below navigation:

ESS > Indian Taxes > Record Tax Declaration/Proof Submission > Other Income Details

After reading all this, your curious mind may have many questions. Let’s try to address some of them here.

What difference does it make if my payroll system is considering budget changes from September payroll instead of August 2024?

All the above-mentioned changes are applicable from April 2024, except consideration of TDS/TCS paid by you which will be applicable from October 2024. As monthly TDS from salary is calculated considering your annual taxable income and annual tax rates, TDS from September 2024 payroll and onwards will get auto-adjusted considering the tax regime you have opted, eligible exemptions, deductions, revised tax rates and monthly TDS already deducted from your salaries paid in the previous five months (April-August 2024).

How will this impact my take home salary from the month of September 2024 and onwards?

For employees who have opted for Old Tax Regime, the tax liability may not get impacted much. If you have paid TDS/TCS, you can claim the same from October 2024 and onwards to reduce your monthly TDS payable. For employees who have opted for New Tax Regime, additionally, they will benefit from better tax rates, higher standard deduction and higher deduction u/s 80CCD(2) if their employer increases its contribution to NPS/APY from 10% to 14% of salary.

Should I now switch to the New Tax Regime?

Depends! It depends on your salary structure and types of benefits received like house rent allowance, leave travel allowance, children education allowance etc. which are subject to tax exemptions, to some extent. It also depends on the kind of expenditure you are making like medical insurance premium, life insurance premium, prepayment of housing loan, life insurance premium etc., kind of investments you are making like in eligible mutual funds, National Pension Scheme, Atal Pension Yojana, Sukanya Samridhi etc. and related other factors for which you can claim deductions under Chapter VI-A of Income Tax Act, as some exemptions and deductions are only available under the Old Tax Regime.

To figure out which regime works better for you, you can use this calculator given by the Income Tax Department.

What if I now want to switch from Old Regime to New Regime?

Considering the favourable changes made under New Tax Regime, many employees would now be deliberating on switching to default New Tax Regime from Old Regime, or may have already decided to do so! However, considering the administrative efforts involved at employer’s end, Circular no. 4/2023 was issued by the Income Tax Department on April 05, 2023 to guide employers that they can take declaration from their employees about their choice of regime for the purpose of TDS from salary u/s 192. It was also provided that if an employee wants to change the option later, he/she can do so at the time of filing annual Income Tax Return (ITR).

So, it’s up to the employer now whether it re-opens the window for tax regime selection or not. If not, don’t worry! You can still switch back to New Tax Regime at the time of ITR filing for the AY 2025-26 which will be due by July 31, 2025.

If you still have further questions, please reach out to your dedicated contact person from Ramco and we’ll get back to you at the earliest opportunity.

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